Abstract

CEO incentive contracts are commonplace in China but their incidence varies significantly across Chinese cities. We show that city and provincial policy experiments help explain this variance. We examine the role of two policy experiments: the use of Special Economic Zones (SEZs) to attract foreign direct investment (FDI), and the rate at which state owned enterprises (SOEs) were privatised. CEO incentive contracts are negatively correlated with foreign ownership and with the introduction of FDI via SEZs. However, the SEZ effect disappears having accounted for the city-level composition of firms and executives. Rapid SOE privatisation is associated with higher city and firm-level adoption of CEO incentive contracts, irrespective of the firm's own current ownership status. The positive effect of privatisation is robust to various estimation techniques and model specifications.